POLICY NOTE
Eco-compensation in China’s
Evolving Environmental
Management Regime
Ecological Protection and Water Pollution Control in the
Yangtze River Basin
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Please cite this work as follows: World Bank (2021). Eco-compensation in China’s Evolving Environmental Management
Regime: Ecological Protection and Water Pollution Control in the Yangtze River Basin. World Bank, Washington, DC.
Cover Photo: Tiger Leaping Gorge, Yunnan Province, China. Xiawei Liao. World Bank.
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POLICY NOTE
Eco-compensation in China’s
Evolving Environmental
Management Regime
Ecological Protection and Water Pollution Control in the
Yangtze River Basin
Contents
Acknowledgments............................................................................................................ 5
Section 1. Introduction...................................................................................................... 6
Section 2. An Overview of the Yangtze River Basin and the Yangtze River
Economic Belt (YREB)....................................................................................................... 8
Section 3. The Role of Eco-compensation in the YREB............................................... 12
Section 4. Eco-compensation Case Studies in the YREB............................................ 16
Case 1. Chishui River Water Fund: A Multi-Provincial Water Fund.......................................................... 18
Case 2.Dongting Lake: An Environmental Protection Subsidy in the Middle Reach ........................... 19
Case 3. Jiangxi River Basin Eco-Compensation Program: A Vertical Fiscal Transfer in
the Middle Reach............................................................................................................................................. 21
Case 4.Xin’an River Eco-Compensation: An Inter-provincial Horizontal Transfer in the
Lower Reach..................................................................................................................................................... 23
Case 5.Taihu Lake Water Pollution Trading in the Yangtze River Delta region...................................... 25
Section 5. Challenges and Recommendations for Improving
Eco-compensation in the YREB...................................................................................... 27
Institutional and regulatory framework........................................................................................................ 28
Information and knowledge........................................................................................................................... 29
Incentives and cost-effectiveness................................................................................................................ 31
Section 6. Conclusion..................................................................................................... 34
4 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
Acknowledgments
This policy note was prepared by a World Bank team led by Xiawei Liao (Water Resources Specialist) and David Kaczan
(Economist), and included Zeng Xiangang (Environmental Economist, Renmin University), Marcus Wishart (Lead Water Resources
Specialist), Si Gou (Water Resources Specialist), Daniel Mira-Salama (Senior Environmental Specialist), Xiaokai Li (Lead Water
Resource Specialist), Michael T. Bennett (Environmental Economist, Consultant), Qi Tian (Water Resource Specialist), and
Xiaojun Yang (Associate Professor, Xi’an Jiaotong University). Jieli Bai (Program Assistant), Dan Xie (Program Assistant),
Jingjing Sun (PhD candidate, Xi’an Jiaotong University), and Jehona Gashi (Program Assistant) provided administrative and
research support.
The work is a contribution to the program on Evaluating and Realizing the Value of Water in the Construction of an Ecological
Civilization for China, a collaborative venture between the World Bank and the Development Research Center of the State
Council of the People’s Republic of China (DRC).
The DRC team is led by Dr GU Shuzhong (Deputy Director General of the Institute for Resources and Environmental Policies)
and includes Li Weiming (Director of Research Division, Institute for Resources and Environmental Policies), and Yang Yan
(Associate Research Fellow, Institute for Resources and Environmental Policies) along with other researchers from the
DRC, the Chinese Academy of Sciences (CAS), the Chinese Academy of Agricultural Sciences (CAAS), the Institute of Water
Resources and Hydropower Research (IWHR), and the DRC of the Ministry of Water Resources (MWR).
The work on Evaluating and Realizing the Value of Water in the Construction of an Ecological Civilization for China was
developed under the leadership of Victoria Kwakwa (Vice President for East Asia and the Pacific), Martin Raiser (Country
Director for China), Benoît Bosquet (Regional Director, Sustainable Development, East Asia and the Pacific), and Jennifer
Sara (Global Director of the Water Global Practice) from the World Bank; and Vice Minister Wang Yiming and Vice Minister
Long Guoqiang from the DRC along with his ministerial colleagues from the government of the Peoples Republic of China.
The team thanks Harold Bedoya (Operations Manager), Ann Jeannette Glauber (Practice Manager), Sudipto Sarkar (Practice
Manager), Christian Peter (Practice Manager), and Jin Liu (Senior Environmental Specialist) for guidance and support.
Guidance was provided during implementation by a Steering Committee comprising Wang Yiming (DRC), Long Guoqiang
(DRC), Martin Raiser (World Bank), Jennifer Sara (World Bank), and officers of the Ministry of Ecological Environment (formerly
Ministry of Environmental Protection), the Ministry of Natural Resources (formerly Ministry of Land and Resources), the
Ministry of Finance, the Ministry of Housing and Urban-Rural Development, and the Ministry of Agriculture and Rural Areas.
The team also discussed with and obtained valuable advice from other experts within the World Bank, officials from the
government of the Peoples Republic of China, along with universities and non-government organizations working on water
resources related research in China.
Constructive reviews of this report were received from Hua Wang (Professor, Environmental Economics and Management,
Renmin University), Halla Maher Qaddumi (Senior Water Economist), Giovanni Ruta (Senior Environmental Economist),
Stefano Pagiola (Senior Environmental Economist), and Sebastian Eckardt (Lead Economist, China).
This report was made possible with the financial support of the Global Water Security and Sanitation Partnership (GWSP),
which supports client governments to achieve the water-related Sustainable Development Goals through the generation
of innovative global knowledge and the provision of country-level support.
5
Photo: Tiger Leaping Gorge, Yunnan Province, China. Xiawei Liao. World Bank.
Section 1.
Introduction
The Yangtze River and the economic belt it defines are central to China’s economy, yet they
face severe environmental challenges. The river plays a major role in the historical, cultural,
and political identity of China, and is a key driver of the country’s economy. It is one of the world’s
most biodiverse regions, with ecosystems and natural resources that underpin national water,
food, and energy security. Yet over the past four decades, the Yangtze River Basin has experienced
large-scale, high-intensity development that has severely impacted ecological and hydrological
conditions. The region is emblematic of the challenges China faces as it looks to transition toward
higher quality green development.
The government has made a more balanced approach transfers used to incentivize and compensate for the costs
to development of this region a major priority, with a of ecological protection—are increasingly being used to
“Yangtze River Economic Belt Development Plan” released support implementation, with their number growing rapidly
in 2016. This was supported by the country’s first basin in varied forms along with funding flows. Given experience
specific law in 2020, which along with provincial-level plans to date, there are opportunities to learn from the application
and other guidance promotes an overall goal of improved of eco-compensation across the basin, as provinces and the
ecological protection, improved water quality, and sustain- national government look to scale and replicate.
able development. Eco-compensation mechanisms—fiscal
This policy note reviews experiences with eco-compensation development in the YREB; (2) assesses the effectiveness
in the Yangtze River Economic Belt (YREB), and makes of the current eco-compensation schemes in the YREB
recommendations for enhancing outcomes. Specifically, the through a series of case studies; and (3) proposes policy
note: (1) provides an overview of the development progress recommendations for improving eco-compensation schemes
of eco-compensation schemes in the YREB in support of in the YREB.
the national strategy for ecological protection and green
MAP 1.1: Eleven Provinces and Municipalities Included in the Yangtze River Economic Belt
Source: World Bank.
Section 1. Introduction 7
Photo: Marcus Wishart. World Bank.
Section 2.
An Overview of the Yangtze River Basin and
the Yangtze River Economic Belt (YREB)
The resources within the basin drive China’s economy and are of global significance. The basin
includes 19 provinces and autonomous regions in total, including 9 provinces and 2 municipalities
that define the Yangtze River Economic Belt (YREB) (Map 1.1).1 Its annual water resources are
estimated at over 995 billion cubic meters, roughly 35 percent of China’s total water resources.
The waters of the YREB supply more than 200 billion cubic meters to industries and populations
along the river and provide drinking water for almost 600 million people.2 It is home to 50 percent
of grain production and more than 70 percent of fishery production, and is one of the world’s
busiest inland waterways for freight traffic, with the basins manufacturing hubs lying at the heart
of global supply chains. In 2018 the gross domestic product (GDP) generated in the region was
estimated to be US$5.7 trillion (Chinese yuan [CNY] 40.3 trillion, accounting for 45 percent of
GDP)3—effectively the third largest economy in the world.4
1 Yunnan, Sichuan, Chongqing, Guizhou, Hubei, Hunan, Jiangxi, Anhui, Jiangsu, Zhejiang, and Shanghai from west to east.
2 The direct beneficiaries of the South-to-North Water Transfer have reached over 120 million with the water transfer from the first phase projects of middle and east
lines. Source: CCTV news, December 5, 2019, (Chinese) (link).
3 China Statistical Yearbook, 2019.
4 After the US (US$22.32 trillion) and China (US$15.27 trillion) (link).
8 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
The basin has some of the highest levels of biodiversity in into oceans globally by rivers each year, making it one of
the world. The Yangtze River is the longest river to flow entirely the world’s largest plastic-contributing rivers.8, 9
within one country, traversing a wide range of ecosystems. It
Despite the economic significance of the Yangtze River
is one of the world’s most biologically diverse eco-regions due
Basin the region also faces persistent development
to its climatic, geographical, and geomorphological diversity
challenges, especially in the middle and upper reaches.
and the hydrological complexity and interconnectedness
As indicated in figure 2.1, in 2019, GDP per capita in the
of the river, it’s floodplain, and the numerous lakes.5 The
lower reaches was 1.5 times of that in the middle reach,
basin supports over 200 fish species, more than 84 mammal
and 1.7 times of that in the upper reaches. GDP per capita
species, 60 amphibian species, and 87 reptile species. Over
is the lowest in Guizhou (approximately US$7,144 in 2019)
40 percent of the basin is covered by forest, and is home
and the highest in Shanghai (approximately US$24,090 in
to some of China’s most iconic and endangered species,
2019, which is three times that in Guizhou). The urbanization
including the Chinese sturgeon, Chinese alligator, and the
rate is the lowest in Guizhou and Yunnan (49 percent) while
Giant Panda. The basin is also home to 33.0 percent of
highest in Shanghai (88 percent). In 2019, there were 237
China’s rare or endangered freshwater fish species, and
nationally designated poverty counties in the YREB10 out
39.7 percent of the country’s rare or endangered plants.
of 584 in total in the country, which were primarily located
The basin’s lakes provide critical habitat for internationally
in the upper and middle reach provinces. While extreme
migratory birds, including 95 percent of the wintering Siberian
poverty was eradicated by the end of 2020, there are still
crane population.
persistent challenges in addressing and ensuring equitable
Water pollution, changes in flow, reductions in wetland socioeconomic development across the basin. However, it
area, and eutrophication of lakes have significantly should be noted that the GDP growth rate was the highest
impacted the basin’s ecosystems and biodiversity. Over in Guizhou Province in the upstream, with an annual growth
the past four decades, the Yangtze River Basin has experi- rate of nearly 16 percent over the last 10 years; while the
enced large-scale, high-intensity development and today lowest was in Shanghai with an annual growth rate of just
contains most of the nation’s water-polluting industry. Urban above 9 percent.
areas have increased by 40 percent over the past 20 years,
The government’s strategy for the Yangtze River Economic
and lake and wetland areas have decreased significantly,
Belt emphasizes the need to balance economic development
with more than 800 lakes within the central basin lost to
and environmental protection in the context of rapid
land reclamation. Over 40 percent of lakes and reservoirs
development in the middle and upper reaches. The national
in the basin are subject to eutrophication.6 According to
program for the Yangtze River Economic Belt is articulated
the Changjiang Water Resources Commission, of the 329
through the “YREB Development Plan” issued by the National
drinking water resources monitored, only 59 percent met
Development and Reform Commission (NDRC) in October 2016.
relevant water quality standards all year round.7 The river
This emphasizes prioritizing ecological protection, river basin
reportedly contributes between 0.31 and 0.48 million of the
coordination, and integrated development. Implementation
estimated 2.40 million tons of total plastic waste deposited
is guided by the “Action Plan for the Yangtze River Protection
and Restoration” released by the NDRC with the Ministry
8 For the purpose of this report, the terminology “plastics” includes mac-
ro-plastics (size > 5 mm, according to GESAM Report #99) and microplas-
5 World Wildlife Fund. 2020. Living Yangtze Report (link). tics (size < 5 mm, according to GESAM Report #99) leaking to waterways
from point and nonpoint sources.
6 Tang, et al. 2020. Response of Eutrophication Development to Variations in
Nutrients and Hydrological Regime: A Case Study in the Changjiang River 9 Lebreton et al. 2017. River plastic emissions to the world’s oceans, Nat.
(Yangtze) Basin. Water, 12, 1634 (link). Commun. 8, 15611 (link).
7 Hu F. (2016) Yangtze Flows: Pollution & Heavy Metals. China Water Risks 10 As of January 2019, 67 counties in Yunnan, 47 in Guizhou, 37 in Sichuan, 26
(link). in Hubei, 20 in Hunan, 18 in Anhui, 13 in Jiangxi, and 9 in Chongqing.
Section 2. An Overview of the Yangtze River Basin and the Yangtze River Economic Belt (YREB) 9
FIGURE 2.1: Imbalanced Development across the Yangtze River Economic Belt Region
GDP per capita (Thousand US$ per year) 30 100
25
80
Urbanization rate (%)
20
60
15
40
10
20
5
0 0
Sichuan
Guizhou
Chongqing
Hubei
Hunan
Jiangxi
Anhui
Jiangsu
Zhejiang
Shanghai
Yunnan
Upper Middle Lower
Province and Yangtze River Reach (upper, middle, or lower)
GDP per capita (US$ per year) Urbanization (%)
Data source: National Statistical Bureau of China.
of Ecology and Environment (MEE) in 2019.11 Tasks include would establish water quality baselines, reduce pollutant
establishing integrated land-water management systems, discharge, promote ecological restoration (including through
reducing rural point and nonpoint source pollution, reducing ecological flows), protect biodiversity, and improve systems
industrial and water vessel pollutions, enhancing drinking for information sharing. The law institutes regular inventories
water security, and ensuring ecological flows in rivers. of natural resources and biodiversity and strengthens systems
for disaster prevention and mitigation. The law is relatively
The government’s efforts are supported by a legislative
high level, and its implementation will require the development
plan for protection of the Yangtze River. Approved by the
of detailed regulations and guidelines, and the preparation
National People’s Congress on December 26, 2020, the
of investments by multiple levels of government.
law came into effect in March 2021 and is the first law for a
specific river basin in China. In line with the Development The law represents the latest in a series of national
Plan and Action Plan, it was formulated to strengthen the level reforms aimed at improving the management of
protection and restoration of ecosystems in the Yangtze natural resources and the coordination of water resources
River Basin and facilitate the effective and rational use of development. In 2012, the “Most Stringent System for Water
water resources. The law requires establishing a National Resource Management,” also known as the “Three Red Lines,”
Yangtze River Basin Coordination Mechanism and infers was established to set specific targets for water withdrawals,
obligations on national government line agencies and water use efficiency, and water quality. Recognizing the need
provinces toward its objectives. Among others, the law calls for improved interjurisdictional coordination, the Water Law
for local governments to develop laws and regulations that was amended in July 2016 to support integrated planning and
11 MEE, NDRC, Action Plan for the Uphill Battle for the Conservation and
Restoration of the Yangtze River, January 24, 2019. (link).
10 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
coordinated basin development.12 A ministry restructuring and lake chiefs, including more than 200,000 in the Yangtze
in 2018 reorganized responsibilities for water resource River Basin.
management, transferring many of the responsibilities for
Eco-compensation mechanisms are increasingly being
water pollution control to MEE, establishing the Ministry of
used to support implementation of national and provincial
Natural Resources (MNR), and consolidating responsibilities
plans for ecological protection and water pollution control
within the Ministry of Water Resources (MWR). Earlier in
in support of the national strategy for the YREB. These are
2007, the government established a system of river and
implemented in line with the Guiding Opinions on Establishing
lake chiefs, a network of individuals at local, county, and
Eco-Compensation and Long-Term Protection Mechanism in
provincial levels responsible for overseeing each section of
the YREB issued in 2018 by the Ministry of Finance. Specific
every major waterway.13 This system incentivizes action via
provisions have also been codified in the Yangtze River
attribution of outcomes to specific officials, and creates a
Protection Law, which provides for the establishment of new
platform for collaboration that has proven useful in coordinating
eco-compensation schemes, as well as improvements in
trans-jurisdiction issues and enhancing citizen engagement
existing schemes that pay compensation for key ecological
in basin management. China now has over 1.2 million river
zones and incentivize reductions in cross-province and
cross-county water pollution levels.14
12 Clause 15 of the amended “Water Law of the People’s Republic of China,”
indicates that “planning for regions within the boundary of a river basin
should follow the river basin planning, and the sector planning should
follow the integrated planning.”
13 The River and Lake Chief System is intended to strengthen enforcement
and accountability regarding water use control, water quality protection,
and restoration of degraded waterways. River chiefs at the village level 14 These mechanisms could include horizontal eco-compensation (payments
are required to patrol no less than once a week, while also promoting river from one province to another, or one county to another), a water pollutant
protection and mobilizing the community to assist in the removal of waste. discharge rights exchange, and a carbon emissions right exchange.
Photo: Panoramic view of the first bend of the Yangtze River in Lijiang, Yunnan Provnice, China. iStock.
Section 3.
The Role of Eco-compensation in the YREB
The development of eco-compensation mechanisms for environmental management and
protection in China has evolved over more than two decades. Early efforts were first codified
in 2005 when the State Council proposed using eco-compensation to support environmental
protection in the State Council decision to implement the scientific outlook of development and
protect the environment (State Council No. 39). In 2007, the Environmental Protection Bureau
issued Guidance opinion on implementing eco-compensation pilots. In 2014, the No. 1 Central
Policy Document proposed to establish eco-compensation schemes in river headwater regions,
important water source regions, important water ecological regions, and flood retention areas. In
2015, the State Council issued Opinions to accelerate the construction of ecological civilization,
which proposed to improve eco-compensation schemes and issue related legislations. In 2016,
the State Council General Office issued Opinions on improving eco-compensation schemes, which
required the establishment of eco-compensation schemes in all important ecological areas by
2020. In November 2020, the National Development Reform Commission (NDRC) published the
draft National Eco-Compensation Regulation online for public consultation.
12 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
Eco-compensation is a diverse set of tools, operating on (3) improve performance-based incentive mechanisms; (4)
different governance levels and scales. It is not a single establish river basin horizontal eco-compensation mechanisms;
policy or program; it is a conceptual approach to environmental (5) improve financial and fiscal systems, e.g., environmental
management rooted in the use of fiscal transfers to reduce taxes, to create stable revenues for ecological protection;
environmental externalities. Eco-compensation is defined and (6) attract private sector participation.
by monetary incentives for ecologically beneficial actions,
In response, transfers under the National Key Ecological
including direct government payments to individuals and
Zones Program (NKEZP) have increased significantly in
communities for the protection and provision of ecosystem
the Yangtze River Economic Belt from 2018. The NKEZP
services; compensation to households, communities, or
program is one of the largest ecological fiscal transfers in
regional governments for regulatory takings; and frameworks
China and aims to support local governments in complying
for cooperation and fiscal transfers between jurisdictions,
with the National Key Ecological Function Zones Spatial
among others. Over the past decade, the term has broadened
Plan, which designates development restrictions in certain
considerably as it has increased in prominence. Four of the
local regions of ecological importance. Transfers under the
more common eco-compensation types include (1) vertical
NKEZP to the 11 provinces (figure 3.1) in the YREB increased
fiscal transfers between different levels of governments;
from CNY 23.99 billion (US$3.6 billion) in 2017 to CNY 32.51
(2) horizontal fiscal transfers between governments of the
billion (US$5.0 billion) in 2020. Provinces in the upper
same level; (3) direct payments to individuals, e.g., farmers;
reach (i.e., Yunnan, Guizhou, and Sichuan) received higher
and (4) market-based mechanisms, such as water trading
transfers than middle-reach provinces (i.e., Hunan, Hubei,
and water pollution trading. The concept has many parallels
and Jiangxi) while the lower-reach provinces (i.e., Shanghai,
with payments for ecosystem services (PES), which could
Jiangsu, and Zhejiang) received the least transfers. From
be seen as one form of eco-compensation.
2018 to 2020, among the total National Ecological Zone
High-level documents see eco-compensation as a desirable Transfers, CNY 4 billion (US$ 615.3 million) was dedicated
means to address the unbalanced development needs as “YREB subsidies,” which are targeted at ecological and
between upstream and downstream regions of the Yangtze environmental protection in the YREB region. However, to
River Economic Belt (YREB). In 2018, the Ministry of Finance put it into context, China Development Bank alone disbursed
issued the Guiding Opinions on Establishing Eco-Compensation loans of CNY 488 billion (US$75.0 billion) in 2020 to support
and Long-Term Protection Mechanism in the YREB which Yangtze River Ecological Protection and Green Development,
outlined four tasks for central government to (1) emphasize among which CNY 89.4 billion (US$13.0 billion) were used
ecological protection in general fiscal transfers; (2) increase for ecological protection and restoration.15 Therefore, the
national key ecological zone transfers to the YREB provinces amounts of eco-compensation funds are relatively small
(discussed further, below); (3) implement the “YREB Ecological compared to other channels of funds in China, but they play
Protection and Rewards Policy” in 2018, which committed an important incentivizing function.
CNY 18 billion (US$2.7 billion) from 2017 to 2020 to incentivize
Plans for intra-province river basin eco-compensation
the establishment of horizontal eco-compensation schemes
schemes, i.e., programs that pay local governments within
in the YREB, including intra provincial and inter-provincial
a specific province for watershed protection actions,
schemes; and (4) increase various special funding in the
have been in place for all 11 provinces/municipalities
YREB, including for energy efficiency and reforestation,
in the YREB since 2016. These documents outline the
among others.
approach to funds management, resource allocation, and
The guiding opinions on establishing eco-compensation methods for evaluation. The intra-provincial river basin
for ecological protection in the YREB also outline six tasks eco-compensation schemes are primarily managed by the
for subnational governments. These include obligations to
(1) increase financing to compensate ecological protection; (2) 15 Xinhua News Agency (Jan 20, 2021). China Development Bank will lend
488.8 billion yuan to the Yangtze River protection and green development
promote location- and topic-specific funding arrangements; field in 2020 (link).
Section 3. The Role of Eco-compensation in the YREB 13
FIGURE 3.1: National Key Ecological Zone Transfer from 2017 to 2020 in YREB
Lower Reach Middle Reach Upper Reach
7
6
5
China ¥ billion
4
3
2
1
0
Jiangsu
Jiangxi
Hubei
Hunan
Chongqing
Sichuan
Guizhou
Shanghai
Anhui
Yunnan
Zhejiang
2017 2018 2019 2020
Data source: Ministry of Finance.
Provincial Department of Finance (PDF), sometimes jointly opportunity development costs, and/or to incentivize
with the Provincial Development and Reform Commission local governments for water quality improvement. For
(PDRC). The relevant technical departments are responsible instance, Hunan Province set up a Dongting Lake Ecological
for evaluating the results and typically include the Department Protection Fund from 2018 and 2020 and allocated CNY
of Ecology and Environment (DEE) and the Department of 3.2 billion (US$492.3 million) to incentivize environmental
Water Resources (DWR), among others, depending on the protection by local governments, including urban and
objective of the individual scheme, such as water quality, rural wastewater management, rural nonpoint source
environmental flow, or water ecology. pollution reduction, and wetland restoration, among
There are three principle types of intra-province river other activities.
basin eco-compensation schemes. These include (1) fiscal 2. Horizontal eco-compensation schemes: fiscal trans-
transfers from province to cities/counties, known as vertical fers between the same level of jurisdiction, such as
transfers; (2) fiscal transfers between cities/counties, known between provinces, municipalities, or counties. For
as horizontal transfers; and (3) pooled funds among cities/ example, payments are made to an upstream county
counties: to compensate for foregone development opportunities
1. Vertical eco-compensation schemes: fiscal transfers from if water quality at a designated cross-section meets
higher-level governments (i.e., central and provincial) certain targets. If the targets are not met, the payment
to lower-level governments (i.e., municipal and county) is made to the downstream county to compensate for
to compensate for the costs of ecological and environ- damages brought by the poor water quality and costs
mental protection, including actual costs and foregone to improve water quality.
14 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
3. Pooled eco-compensation funds: an aggregation of basin between Hunan and Chongqing. For the Xin’an River
funds provided by several jurisdictions for an agreed eco-compensation, cross-sector joint leading groups are set
purpose. For example, municipalities in the Tuo River up in each province, based in the provincial Department of
basin, Sichuan Province, contribute CNY 0.5 billion Natural Resources (DNR). Other inter-provincial river basin
(US$76.9 million) every year for ecological protection eco-compensation schemes are jointly managed by the
in the shared basin. Funds are then allocated according respective provincial PDFs and DEEs.
to an agreed formula used to evaluate the environmental
Besides river basin eco-compensation schemes, governments
performance of the participating municipalities.
(including central, provincial, municipal, and county) are
Pooled funds and direct fiscal transfers are also used to also paying farmers and agencies to compensate for their
support inter-provincial river basin eco-compensation efforts in protecting wetlands, forests, farmlands, and
schemes. In 2018, Sichuan, Guizhou, and Yunnan signed grasslands. Wetland areas in the YREB account for about
the Chishui River Eco-compensation Agreement, jointly 20 percent of the national total, amounting to 0.25 million
setting up a CNY 200 million (US$30.7 million) fund for water square kilometers. While wetland and farmland compensation
pollution reduction. In 2012, Zhejiang and Anhui signed the schemes are often jointly managed by DNR, the Department
first three-year inter-provincial river basin eco-compensation of Agriculture and Rural Affairs (DARA), DEE, PDRC, and PDF,
agreement on the Xin’an River basin. If the water quality at eco-compensation for forests and grasslands are primarily
an inter-provincial section meets annual targets, downstream managed by the Forestry Bureau and PDF. A main challenge
Zhejiang pays CNY 100 million (US$15.3 million) to upstream for these eco-compensation schemes is that the compensation
Anhui, and vice versa. The central government supplements standards are often lower than the foregone development
the payments with CNY 300 million (US$46.1 million) every opportunities for the farmers, especially in the context of
year. For the second (2015–2017) and third (2018–2021) rapid social-economic development, which poses challenges
three-year phases, the financing commitment from Zhejiang for the sustainability of such compensation schemes. There
and Anhui increased to CNY 200 million (US$30.7 million) is a risk that farmers could return to livelihoods that are
per year, specifically to address rural wastewater and solid destructive to the environment in the future, although other
waste management. Similar agreements have been signed trends such as urbanization or a strategic program design (that
on the Chu River basin between Anhui and Jiangsu, the Lu increases income through economically valuable activities)
River basin between Jiangxi and Hunan, and the You River could mitigate this risk.
Section 3. The Role of Eco-compensation in the YREB 15
Section 4.
Eco-compensation Case Studies in the YREB
The World Bank has been requested to support the Government’s strategy for ecological
protection in the Yangtze River Economic Belt (YREB) (Box 4.1.). The proposed US$400 million
IBRD loan uses a Program for Results structured around three pillars: (1) improving institutions
and innovations to promote cross-sector and interjurisdictional coordination through policies,
regulations, and guidelines for green development and ecological protection; (2) advancing
ecological protection through Integrated River Basin Management supporting implementation
of policy measures, regulations, and guidelines aimed at improving ecological protection and
integrated water resources management in demonstration subbasins; and (3) reducing water
pollution and transmission of plastic waste through investments aimed at reducing pollution
loads, including plastic wastes, in demonstration counties within these subbasins.
This policy note presents an overview of five eco-com- region. Selection of the case studies is primarily focused
pensation schemes within the Yangtze River Economic on water pollution reduction and water ecology protection
Belt. As shown in Map 4.1., these include (1) a multi-provincial purposes to inform the preparation of the proposed World
pooled water fund in the upper reach; (2) a vertical earmarked Bank–financed Yangtze River Protection and Ecological
fund in the upper-middle reach; (3) a vertical general fiscal Restoration Project, while acknowledging that other types
transfer in the lower-middle reach; (4) an inter-provincial of compensation schemes also exist and play significant
horizontal eco-compensation in the lower reach; and roles in the YREB, e.g., conversion of cropland to forest, a
(5) a water pollution trading market in the Yangtze delta forest eco-compensation scheme.
Box 4.1.
Yangtze River Protection and Ecological Restoration Program
The proposed program16 development objective is to improve institutional environment management in demonstration basins; and (3) reduced
coordination, enhance ecological protection, and reduce water pollution pollutant loads entering waterways from demonstration areas. Intermediate
in select regions of the YREB. The program is intended to contribute to outcomes relate to investments associated with wastewater collection
the government’s national strategy for the ecological protection of the and treatment, solid waste management, and agricultural nonpoint source
Yangtze River by financing a series of provincial subprograms through pollution control.
the Program-for-Results instrument supported by a basin subprogram
Proposed activities and envisaged outputs under the basin subprogram
financed through Investment Project Financing.
are structured in five areas: (1) integrated control strategy and piloting of
Outcome indicators are proposed that include (1) improved coordination key water pollutants in the Yangtze River, focusing on total phosphorus;
mechanisms for river basin management; (2) enhanced integrated water (2) database for the environment and natural resources in YREB; (3)
Yangtze River Basin integrated ecological restoration study and piloting;
(4) Yangtze River ecological assets value realization mechanisms; and
16 Yangtze River Protection and Ecological Restoration Program (link). (5) River-Lake Relationship focusing on Poyang Lake and Dongting Lake.
16 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
MAP 4.1: Five Case Studies of Eco-compensation Schemes in the YREB
YANGTZE RIVER BASIN
MAIN WATERWAY NETWORK
OTHER WATERWAYS
PROVINCE CAPITALS
NATIONAL CAPITAL
INTERNATIONAL BOUNDARIES
Harbin
Changchun
Dongting Lake Ecological Protection Fund
(vertical program)
Payments are made by Hunan Province from a special
fund to subsidize water pollution reduction and Shenyang
ecological restoration measures by counties.
• Period: 2018 - 2020
• Amount: CNY 3.2 billion (US $493 million)
Hohhot • Scope: 25 counties
Yellow
Riv
er
Tianjin
BEIJING
Chishui River Program Shijiazhuang Tai Lake Water Pollution Trading
(horizontal program) (market-based program)
Yunnan, Guizhou and Sichuan Provinces jointly contribute Taiyuan A pollution emission permit and trading system pilot
to a fund for ecological restoration and management. in Jiangsu Province, with trading between major water
Payments are made based on water quality improvement. Jinan Revenues from permit sales are
pollution emitters.
• Period: Since 2018
Xining used for water quality improvement measures.
• Amount: CNY 200 million per year (US $31 million) • Period: Since 2010
• Scope: 3 Provinces • Scope: Tai Lake Basin
Yangtze Ri Zhengzhou
ve
r Xi'an
Nanjing
Hefei Shanghai
Tai
Lake
Yangtze Riv
er Wuhan Hangzhou
Lhasa Chengdu
3 Gorges
Dam Poyang
Lake
Dongting
Chongqing Lake Nanchang
Changsha
Fuzhou
Guiyang
Kunming
Pearl Xin’an River Eco-Compensation Program
River
Guangzhou(horizontal and vertical program)
Payments are made between downstream Zhejiang and
upstream Anhui Provinces, based on water quality
Nanning improvements. Central government also provides budget
to support this program.
• Period: Since 2012
• Amount: CNY 5.7 billion (US $885 million)
• Scope: 2 Provinces
Haikou
Jiangxi River Basin Eco-Compensation Program
(vertical program)
100°E Payments are made by Jiangxi Province to counties, based on
110°E 120°E
each county’s water quality, forest area, and water
management outcomes.
IBRD 46059 | • Period: Since 2015
JULY 2021
This map was produced by the Cartography Unit of the World Bank Group. The • Amount: CNY 14 billion (US $2.2 billion) over 5 years
boundaries, colors, denominations and any other information shown on this map do • Scope: 100 counties in Jiangxi
not imply, on the part of the World Bank Group, any judgment on the legal status of
any territory, or any endorsement or acceptance of such boundaries.
Source: World Bank.
Section 4. Eco-compensation Case Studies in the YREB 17
Case 1.
Chishui River Water Fund: A Multi-Provincial Water Fund
In 2018, Guizhou, Yunnan, and Sichuan signed the first For example, the annual average water quality indicators at
multi-provincial eco-compensation agreement. These three the Qingshuipu section in Yunnan and Lianyuxi in Guizhou
provinces were co-signatories to the Chishui River Basin were to meet the Class II requirements. Assessments are
Horizontal Ecological Protection Compensation Agreement, based on the water quality monitoring data from the China
in which they jointly contributed CNY 200 million (US$30.7 National Environmental Monitoring Center, automatically
million) each year from 2018 to 2020 to a Chishui River monitoring or jointly monitoring by concerned provinces.
horizontal watershed eco-compensation fund (Yunnan paid
The allocation to an upstream province was deducted
CNY 20 million (US$3.0 million), Guizhou CNY 100 million
(US$15.3 million), and Sichuan CNY 80 million (US$12.3 million)). and transferred to downstream provinces if the water
From this fund, payments for ecological restoration and quality at the cross-provincial section failed to meet the
management were allocated at a set ratio (Yunnan received target. For example, if the water quality failed to meet the
CNY 60 million (US$9.2 million), Guizhou CNY 80 million requirements at Qingshuipu, the fund that was allocated to
(US$12.3 million), and Sichuan CNY 60 million (US$9.2 Yunnan would be deducted and reallocated to Sichuan and
million)). Each province allocated the funds they received Guizhou, half and half. Similarly, if water quality at Lianyuxi
to the counties based on their ecological importance and failed to meet the targets, funds allocated to Guizhou would
the difficulties in environmental protection. be deducted and reallocated to Sichuan.
Water quality targets included targets on the permanganate Implementation arrangement: Three provinces established
index, ammonia nitrogen, and total phosphorus. The objective joint management mechanisms and took turns hosting the
of the agreement was to maintain Chishui River’s good quality. Annual Chishui River Ecological and Environmental Protection
Photo: Chuishui grand waterfall in Guizhou Province, China. Shutterstock.
18 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
Coordination Meeting, as well as environmental information China, its establishment required a large amount of
sharing, joint law enforcement, and so forth. Each province transaction costs due to many rounds of negotiations,
was responsible for implementation of the eco-compensation which were a result of the lack of nationally unified rules
fund as well as for organizing the review of the annual river and guidelines in terms of the scope of compensation,
basin ecological and environmental protection implementation compensation standards, fund allocation, and so forth.
plan, and providing oversight on the use of eco-compensation 2. To improve the fund allocation method based on
fund and project implementation. improved compensation standards: In the current
There were also private sector financial resources in fund allocation method, more economically developed
addition to the multiprovincial water fund contributed counties may be prioritized in fund allocation because
by the governments. From 2014 onward, the Maotai liquor they face more difficult tasks in pollution reduction as
company committed CNY 0.5 billion (US$76.9 million) (CNY well as higher foregone opportunity costs. However,
50 million per year (US$7.6 million)) over a 10-year period this creates concerns over equity issues as the less
to protect the water quality of the Chishui River in Guizhou. developed counties need the funding the most to protect
Maotai and other liquor companies directly provided financial their relatively good environment.
assistance to local farmers to change their lifestyle and 3. To diversify funding sources and enhance funding
associated land use. sustainability: While the Chishui River basin represents
one of the most pristine water environments and least
Successes and challenges encountered within the Chishui
developed regions in the YREB, with the social-economic
River Multi-Provincial Water Fund hold lessons for the
development of the under-developed counties, their
development of programs across the Yangtze, as well
foregone opportunity cost is growing and therefore
as for further refinements or scaling of the fund itself.
would require increasing amounts of compensation.
Opportunities include:
With limited public financial resources and insufficient
1. To establish national guidelines and standards: private sector participation, funding sustainability poses
While the Chishui River Water Fund represents the a major challenge, while fund allocation methods also
first multi-provincial eco-compensation agreement in need improving.
Case 2.
Dongting Lake: An Environmental Protection Subsidy in the Middle Reach
Dongting Lake is a wetland of international importance area is an important region for China’s crop and livestock
in the upper-middle reach of the Yangtze River Basin. It production, producing about 20 percent of the national crop
is the second largest freshwater lake in China, and along production and 5 percent of live hogs. Due to land use change,
with its slightly larger cousin, Poyang Lake, is considered lake encroachment, and water pollution discharges from
one of the “Kidneys of the Yangtze.” It provides a variety of agricultural, industrial, and domestic point and nonpoint
ecosystem services, including flood regulation, biodiversity, sources, Dongting Lake has been suffering from ecological
navigation passage, and water supply. It has an area of 2,625 degradation, including a shrinking lake area, water quality
square km, a catchment area of 0.2633 million square km, deterioration, sediment accumulation, and biodiversity loss.
and a total storge of 16.7 billion cubic meters. The east part The lake area has shrunk by one-half from the last century,17
of the lake is recognized as a Ramsar site for its significance and the water quality of the lake is only Class IV (not suitable
for migratory birds.
Dongting Lake has been suffering from ecological degradation 17 Qiu. 2014. The research about the countermeasures of environmental
destruction and ecological restoration in Dongting Lake area. Nanjing
due to increasing human activities. The Dongting Lake Forestry University.
Section 4. Eco-compensation Case Studies in the YREB 19
Photo: Dongting Lake Park pier at sunset in Hunan Province, China. Shutterstock.
for human consumption) with total phosphorous (TP) being earmarked fund for ecological protection and restoration,
the main pollutant. Agriculture is the main polluting source occupying a very small proportion of the provincial government
for chemical oxygen demand (COD), total nitrogen (TN), and expenditure (less than 0.2 percent). The fund is managed by
TP, followed by domestic sources. PDF with technical support from line departments, including
the Department of Ecology and Environment, Department
Ecological restoration and protection of the Dongting
of Housing and Urban-Rural Development, Department of
Lake basin is considered a national and provincial priority.
Transport, Department of Water Resources, Department of
In 2014, the State Council approved the “Dongting Lake Agricultural and Rural Affairs, Forestry Bureau, Provincial
Ecological Economic Zone Plan” issued by the National Health Commission and Livestock, and Fishery Bureau.
Development and Reform Commission’s (NDRC’s) Regional
Department, aimed at balancing ecological protection and The fund disburses based on the achievement of targets
economic development in the basin, protecting and restoring set for water pollution reduction and water ecological
ecological systems, ensuring water security in the basin, restoration tasks. These include livestock pollution
and contributing to national and regional food security and management, fertilizer and pesticide pollution reduction,
agricultural modernization. In 2018, Hunan Province issued the urban and rural wastewater management, rural solid waste
“Dongting Lake Water Environment Integrated Management management, rural sanitation, ship pollution and hazardous
Plan” with an “Implementation Plan” for 2018 to 2035, with waste management, water source protection, urban water
specific targets for water supply, water pollution reduction, treatment, river channel dredging, wetland protection and
and hydro-ecological restoration. restoration, and schistosomiasis control. For example, the
fund subsidizes CNY 0.3 million (US$46,153) per km of new
The Hunan Department of Finance (PDF) issued the and upgraded urban wastewater pipeline, CNY 200 (US$30)
“Dongting Lake Ecological Financial Subsidy Methods per household for a rural toilet upgrade, and CNY 1,000
(2018–2020)”, which set up a CNY 3.2 billion (US$492.3 million) (US$153) per hectare of wetland restoration.
20 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
Successes and challenges encountered within the Dongting 2. To promote results-based financing: Dongting Lake
Lake Financial Subsidy hold lessons for the development Environmental Protection Subsidy is used to subsidize both
of programs across the Yangtze, as well as for further outputs, e.g., construction of network, and outcomes, e.g.,
development or scaling of the subsidy itself. Opportunities reduced pollution loads. The outcome-based approach
include:
enhances financing efficiency and should be promoted
1. To evaluate the comprehensive values of water: To where possible.
justify the use of public resources and leverage private 3. To avoid unnecessary duplicate financing: Farmers by the
sector and community resources, it is important to identify lakeside are often entitled to different compensations or
and evaluate the ecosystem services that the Dongting
subsidies from different sector departments, e.g., water,
Lake provides. Attempts at ecosystem valuation have
wetland, and the environment for the same activities.
been made by the National Forestry Bureau,18 as well
Stacking resources is needed if a single compensation
as under the “Wetland and biodiversity conservation
and sustainable use in China” project (supported by the cannot cover the opportunity costs. In order to improve the
Global Environment Facility). However, results have been financing efficiency, a unified implementation arrangement
abstract and high level, and not sufficiently actionable is needed with sufficient information sharing to avoid
for policy decisions. inefficient resource stacking.
Case 3.
Jiangxi River Basin Eco-Compensation Program: A Vertical Fiscal Transfer in the Middle Reach
Jiangxi launched its provincial River Basin Eco-Compensation programming. From 2008 onward, the Ministry of Finance
Program (RBECP) in 2015.19 The RBECP provides support has made special fiscal transfers to protect ecological areas
for 100 counties throughout the province. Funds are used of high significance that are also in need of poverty reduction,
for ecological protection, water environment management, through the NKEFZ program. From 2008 to 2019, the scale of
forest protection and improvement, water conservation and NKEFZ funding nationwide increased from CNY 6.05 billion
protection, ecological poverty alleviation, and livelihood (US$930.7 million) to CNY 81.8 billion (US$12.5 billion), with
improvement projects, targeted toward Poyang Lake and its Jiangxi receiving between CNY 1.6 billion (US$246.1 million)
tributaries, the Yangtze itself, and the Dong River basin. The and 2.6 billion (US$400 million) per year.
program aims to balance environmental considerations with
The RBECP is a cross-sector program that involves seven
development needs given the province’s relative economic
provincial departments and indicator-based funding
disadvantage: in 2019, Jiangxi’s provincial gross domestic
allocations. RBECP funding flows to counties according to
product (GDP) per capita ranked 21 among China’s 31 mainland
four sets of indicators: (1) water quality; (2) forest quality;
provinces, higher only than that of Guizhou and Yunnan in
(3) water resource management; and (4) the ecological
the YREB.
importance of the county. PDF manages and disburses the
The RBECP draws on national key ecological function zones funds, while the Department of Ecology and Environment
(NKEFZ) funding, demonstrating the way in which central (DEE), PDF, the Department of Water Resources (DWR), the
government programs interact and facilitate provincial Department of Agriculture and Rural Affairs (DARA), and
18 Qian, Lou, Chu, Liu, and Hu. 2016. “Ecosystem evaluation of international
important wetlands in Dongting Lake.” Wetland Science. 4(14): 516–523.
19 In November 2015, Jiangxi Province issued the “River Basin Ecological
Compensation Methods in Jiangxi Province (for Trial Implementation)”
(The Methods).
Section 4. Eco-compensation Case Studies in the YREB 21
the Department of Housing and Rural-Urban Development percent of local governments use the RBECP as earmarked
(DOHURD) were responsible for monitoring the relevant funds, while around 21 percent blend RBECP funds with other
indicators and providing data. The results of evaluation are financial sources at the county level. Based on county-level
used to determine the fund allocation for the subsequent self-review reports, in 2018, around 30 percent was used
year (figure 4.1). Counties were required to submit reports for water environment improvement and water resource
on the funding usage and impacts. management, and 55 percent for ecological protection and
conservation, including 18 percent for forest protection and
The program’s funding allocation is also aimed at sup- improvement.
porting poverty reduction. The amount of RBECP funding
allocated to each county (cities, districts) is reduced in line While a causal impact analysis is not currently available,
with the level of local fiscal capacity. This is consistent the RBECP has likely contributed to improved measures
with the program’s intention to compensate for foregone of ecology and the environment in Jiangxi. In 2019, forest
development opportunities in less-developed counties that cover in Jiangxi reached over 63 percent (the second highest
nationally), while the surface water quality compliance rate
are protecting their environment and ecology.
reached over 80 percent, exceeding the national average
RBECP funds are mainly used for ecological protection, by over 30 percent. The drinking water source water quality
water environment management, forest quality improve- compliance rate reached 100 percent, and water flowing from
ment, forest resource protection, water conservation and Poyang Lake into the Yangtze River met Class III standards.
protection, ecological poverty alleviation, and livelihood The RBECP is an instrument for activities that support these
improvements. While the fund uses are not mandated, 75 outcomes.
FIGURE 4.1: Institutional Arrangements for the RBECP
Fund Department of Fund allocation Development and
disbursement Finance for the next year Reform Commission
Water Environment Department of Ecology
Improvement and Environment
Monitoring and evaluation
Forest Quality
Techincal inputs
Forestry Bureau
and Improvement
Counties
Fund use
Department of
Water Resources
Water Resource Department of Agriculture
Management and Rural A airs
Department of Housing and
Rural-Urban Development
Source: Authors’ elaboration.
22 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
Successes and challenges encountered within the RBECP third-party monitoring, as opposed or in addition to
hold lessons for the development of programs across the local governments, who are themselves responsible
Yangtze, as well as for further refinements or scaling of for implementation.
RBECP itself. Opportunities include: 3. To develop opportunities for diversified public or private
1. To optimize basin-level compensation outcomes: sector funding contributions: Stronger monitoring of
While implementation is focused within subbasins, outcomes and greater transparency around fiscal flows
eco-compensation is carried out within administrative over time create confidence among a wider group of
areas (i.e., county, municipality, or province), missing an stakeholders, creating opportunities for diversified
opportunity for gains through coordinated approaches co-financing. These could take the form of matching
between administrative units within a river basin. These grants for private entities engaged in investments with
can be informed through establishing environment goals ecological benefits aligned with the program’s objectives,
at the basin level to guide the design of eco-compensation or matching funds for local governments to develop highly
schemes, including the targets and locations, by focusing localized interventions (for example, to protect their
on hot spots and synergies. An integrated, basin-wide local watersheds). These can also support program fiscal
eco-compensation program would reenforce command sustainability and stakeholder support, strengthening
and control mechanisms to address water pollution control long-term sustainability.
and ecological restoration, and promote more robust 4. To support counties with the potential for improvement
protocols for monitoring environmental outcomes, such (in addition to support that rewards high performance):
as water quality and quantity. Such a scheme could also The fund allocation method prioritizes regions with already
provide the foundation for cap- and trade-mechanisms high environmental performance, with the intention to
for specific water pollutants within the river basin. incentivize continuing strong outcomes and penalize
2. To strengthen performance evaluation systems: While environmental degradation. However, some counties
the program’s actions are correlated with improved may lack the initial support required to make necessary
ecological conditions in the province, limitations in improvements to receive rewards. A tranche of fund
monitoring limit the possibility of causal attribution. allocation (and monitoring) could follow a hot spot approach,
Demonstrating impact could support efforts to target the in which particularly difficult environmental problems
program toward high-impact activities and locations, and areas are identified and supported with time-bound
increase funding support from other levels of government. up-front investments.
Evaluation would be strengthened by using independent
Case 4.
Xin’an River Eco-Compensation: An Inter-provincial Horizontal Transfer in the Lower Reach
Anhui and Zhejiang provinces launched China’s first The first round of pilots lasted for three years (2012–2014).
inter-provincial watershed eco-compensation pilot As recorded in the program’s agreement between the
project in 2012. In order to protect the water resources provinces, the Jiekou section at the junction of Jiangsu,
of Qiandao Lake, while compensating the upstream areas Anhui, and Zhejiang in Xin’an was used as the assessment
that protect those resources, Zhejiang and Anhui launched section, with permanganate, ammonia nitrogen, total
a pilot project for horizontal eco-compensation in the upper phosphorus, and total nitrogen used as the assessment
and lower reaches of the Xin’an River basin, with guidance indicators. The central government granted a subsidy of
from the Ministry of Finance (MOF) and the then Ministry of CNY 300 million (US$46.1 million) to Anhui Province each
Environmental Protection (MEP). year, and the provinces of Zhejiang and Anhui allocated
Section 4. Eco-compensation Case Studies in the YREB 23
CNY 100 million (US$15.3 million) each year, respectively, Zhejiang, for example, are of Class I water quality. Huangshan
totaling CNY 1.5 billion (US$230.7 million) over three years. City, Anhui, has returned 24,000 hectares (ha) of farmland to
These funds were used for industrial structural adjustment, forests, and the forest coverage rate has increased from 77.4
watershed management, water pollution prevention, and percent to 82.9 percent. The area of w etland and grassland
ecological protection. has increased, with natural ecological landscapes accounting
for more than 85 percent of the watershed. Huangshan City
The success of the pilots resulted in increased financing.
has also shut down more than 220 polluting companies,
After the first round of pilots achieved significant results, a
relocated more than 90 companies, and promoted rural
second-round pilot was implemented in 2015–2017, with funds
tourism (with the participation of more than 100,000 farmers).
increasing from CNY 1.5 billion (US$230.7 million) to CNY 2.1
billion (US$323 million). The central government continued Successes and challenges encountered within the Xin’an
to support the second round of pilots, but decreased its River eco-compensation hold lessons for the development
subsidy to Anhui Province year by year, from CNY 400 million of programs across the Yangtze, as well as for further re-
(US$61.5 million), to CNY 300 million (US$46.1 million), and finements or scaling of the Xin’an River eco-compensation
then to CNY 200 million (US$30.7 million) over this period. itself. Opportunities include:
The two provinces each allocated an additional CNY 100
1. To improve understanding on how to reduce nonpoint
million (US$15.3 million) in funds, with these mainly used
source pollutions. The main challenges identified for
for the treatment of sewage and garbage, especially rural
the third-phase implementation of the Xin’an River
sewage and garbage in the border area between the two
eco-compensation agreement include how to effectively
provinces.
reduce nonpoint source pollution in the upstream counties
Each year, the compensation is paid after calculating the in Anhui Province and how to formulate appropriate
compensation index, P, based on monitoring data of the compensation standards without sufficient understanding
water quality of the monitoring cross-section in the previous of the effectiveness of different nonpoint source pollution
year. The index is calculated from the average concentration reduction measures.
value of four pollutant indicators (permanganate index, ammonia 2. To optimize the use of compensation funds. In particular,
nitrogen, total phosphorus, and total nitrogen). When P ≤ 1, the compensation funds from Zhejiang Province were
Zhejiang Province would allocate CNY 100 million (US$15.3 used on key areas of water pollution control and water
million) to Anhui Province; when P > 1 or a major pollution environment protection, mainly for rural sewage treatment
accident occurred in the section of the Xin’an River basin in the upper reaches of the border area between two
in Anhui Province, Anhui Province would allocate CNY 100 provinces, centralized waste disposal, management
million (US$15.3 million) to Zhejiang Province. In all cases, of agricultural nonpoint source pollution, upgrading
the central government would allocate CNY 300 million of sewage treatment plants, and so forth.
(US$46.1 million) to Anhui Province.
3. To promote diversified compensation mechanisms.
The water quality of Qiandao Lake remained stable during The third-phase pilot explored diversified compensation
the compensation period. It ranks among the top among 61 mechanisms in addition to monetized compensation,
key lakes in the country, and was included in the first batch including co-development of natural parks, eco-industries,
of the five “China’s Good Water” sources. Water quality has cultivating talents, exchanging culture, promoting tourism,
improved: 70 percent of the 88 rivers in Chun’an County, and other aspects.
Case 5.
Taihu Lake Water Pollution Trading in the Yangtze River Delta region
Water pollution permit trading is used in the Yangtze meters. The Taihu Lake basin occupies the majority of southern
delta region to combat water pollution. Trading systems Jiangsu, three cities in Zhejiang province, and the majority
for emissions or water use are increasingly emphasized in of Shanghai city. The basin is one of the most economically
eco-compensation policy documents, with the draft National developed regions in China. Although its area only makes
Regulation on Eco-compensation (2020) promoting their up about 0.4 percent of the national total, it produces about
further development as part of efforts to bring greater market 10.0 percent of the national GDP and plays other important
roles, including flood management, irrigation, navigation,
elements to eco-compensation. The first Water Pollution
fishery production, and tourism. It is also an important water
Permit Trading was conducted in Shanghai Minhang District
source that serves over 20 million people (55 percent of
in 1987.20 Trading programs nationwide for water quality
the Taihu Lake basin population).
have remained relatively small.
Deteriorating water quality in Taihu Lake resulted in toxic
Taihu Lake in the Yangtze delta region is the third largest algae blooms. The blooms resulted from increasing wastewater
freshwater lake in China; with a basin that is an important discharge due to rapid industrialization and urbanization in
economic center. Roughly crescent-shaped, the lake is about the basin. Eutrophication, caused by excessive nitrogen and
70 km from north to south with a total surface area of 2,338 phosphorus discharge, affected the water quality as well as
square km and a total storage capacity of 5.77 billion cubic drinking water security for the surrounding population. In
late May 2007, a drinking water crisis took place in Wuxi,
20 Zang, Y. et al. (2017). A Comparative Analysis on the Water Pollution Emis- Jiangsu Province, China, following a toxic algae bloom in
sion Trading System in the Taihu Lake Basin—Based on the Investigation of
Six Cities. Chinese Journal of Environmental Management, 9(1) (link). Taihu Lake, which was the city’s sole water supply, leaving
Photo: Aerial vlew of Taihu Lake in Wuxi, Jiangsu Province, China. iStock.
Section 4. Eco-compensation Case Studies in the YREB 25
approximately 2 million people without drinking water for emission permits can only be used for Taihu Lake water
at least a week. quality improvement measures.
Different levels of government undertook measures to combat The Water Pollution Permit Trading schemes face a number
the water crisis. The national government pledged more than of challenges, with a limited number of transactions.24
US$14 billion as part of a large-scale cleanup project. Many Opportunities to improve the water pollution permit trading
local factories were closed and water treatment regulations systems in China include:
were enhanced as part of a five-year plan to improve water
quality. The government of Wuxi city introduced the system 1. To scientifically determine the environmental capacity
of river chiefs, assigning government officials responsibility of a specific water body: It is difficult to scientifically
of stretches of a river or lake, and including the results of determine the maximum water pollutant emission permit,
water quality testing in the administrative assessment of especially considering the impacts of future climate
the people in charge.21 Water quality improvements were change and the resultant change of water availability
seen following these measures. in the lake.
2. To establish a unified pollution emission permit and
Jiangsu Province piloted a pollution emission permit
trading system across the different jurisdictions within
and trading system in 2008. The MOF and then State
the basin: For example, Huzhou city in Zhejiang has
Environmental Protection Administration (SEPA) allowed the
included TP, TN, and COD in its pollution emission permit
Jiangsu provincial government to carry out a pilot trading
and trading system, while Jiaxing city has only included
system among factories around Taihu Lake in 2008.22 In
COD, which could create a leakage problem for TN and
2010, the provincial environmental department, financial
TP pollution.
department, and price bureau jointly issued the “Jiangsu
Taihu Lake Basin Main Water Pollutants Emission Permit 3. To include agriculture nonpoint source pollutions:
Trading Management Method” and officially launched the Agricultural nonpoint sources contribute the majority
pollution emission permit and trading system. By 2010, 1,357 of TP and TN pollution in Taihu Lake.25 However, the
enterprises with an annual COD discharge of more than 100 current Taihu Lake water pollution emission trading
tons were included in the system.23 system only includes industrial enterprises. Nonpoint
source pollution is particularly difficult to monitor.
Tradeable pollution emission permits are available from 4. To promote the vitality of the market: Many enterprises
several sources, including (1) government reserves during are unwilling to sell their emission permits in light of
an initial allocation; (2) excessive permits sold by private emissions policies that are becoming increasingly strict.
permit holders due to industrial upgrade and pollution Without sufficient trading, it is difficult to realize the
treatment; and (3) returned permits from enterprises that market’s role in minimizing the cost and reaching the
are closed. Fiscal revenues for the government from selling optimal emission reduction levels.
21 Targets and Assessment Measures of Water Quality Control for River
Cross-sections in Wuxi.
22 关于印发江苏省太湖流域主要水污染物排污权有偿使用喝交易
试点方案细则的通知 2008.
Notice on pilot method details of main water pollutant discharge permit 24 Polaris Energy Conservation and Environmental Protection Network (June
paid use and trading in Taihu Lake Basin in Jiangsu Province (2008) 15, 2016). Emissions trading has “tested the waters” in the past ten years
Jiangsu Provincial Department of Environment Protection, Department of (link).
Finance and Pricing Bureau.
25 Cao, JS, Zhang, SY, and Wang, C. 2005. “Application of discharge trading
23 China Environment News (Oct. 25, 2010). Taihu Lake Pollution Rights to control of phosphorus pollution in Taihu Lake.” Journal of Hohai Univer-
Trading Market officially opened (link). sity (Natural Sciences) (in Chinese).
26 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
Photo: The Yangtze river in Hubei Province, China. iStock.
Section 5.
Challenges and Recommendations for
Improving Eco-compensation in the YREB
The rise of eco-compensation is illustrative of China’s efforts toward balanced development.
The evolution of institutional provisions, incentives, and information required for successful
eco-compensation programs provides lessons for their scaling within the Yangtze River Basin in
line with the national government’s priorities, and for their application in other river basins across
China. They are also informative for efforts to promote ecological outcomes in river basins globally.
While the substantial public investments made in support of improving ecosystem services in the
Yangtze River Economic Belt (YREB) have yielded significant benefits, the incremental benefits of
future investments are likely to yield diminishing returns without improvements in institutional
design, and in the data, information, and knowledge base. The following conclusions reflect on
the common challenges identified through this assessment of eco-compensation within the YREB,
with a view to informing the next generation of programs.
Section 5. Challenges and Recommendations for Improving Eco-compensation in the YREB 27
INSTITUTIONAL
AND REGULATORY
FRAMEWORK
Challenge: The construction of ecological compensation mechanisms for water management
There is a need for a stronger in the YREB has mainly been carried out within the scope of each province. There
national-level legal and institutional is a lack of national-level laws and regulations that specify the responsibility
framework to reduce transaction and protocols between provinces for monitoring and verification, settlement
costs. of disputes, and penalties for noncompliance. There is also a lack of unified
guiding principles and legal guarantees for carrying out ecological compensation
between different provinces, and no standardized management mechanism
to govern their implementation.
Recommendation 1: The National Regulation for Eco-compensation, formulated by the National
Develop national guidelines, Development and Reform Commission (NDRC) in 2020 and currently under
standards, and protocols. consultation, should provide an improved legal basis for the national implementation
of eco-compensation schemes. However, more specific protocols, regulations,
and methods are needed from the national level to guide development and
implementation. Among others, national-level guidelines, standards, and
protocols are required to ensure consistency and compatibility in water quality
monitoring and verification, including the determination of river and lake
health indices and environmental flows.
Challenge: Inter-provincial eco-compensation schemes require the cooperation of gov-
There is a need for inter-provincial ernments across provinces, and the cooperation of multiple line departments,
coordination and consultation Provincial Development and Reform Commissions (PDRCs), finance, and other
mechanisms. agencies. However, there is no authoritative platform for consultation in the
YREB, and the river basin management institutions are currently unable to
sufficiently provide this function. Even though some cooperative actions
have been taken by local governments on river basin pollution, the degree
of institutionalization of these cooperative actions is relatively low, and they
stay at the level of meetings. They generally take the form of a collective
consultation, which is strictly a noninstitutional cooperation and coordination
mechanism advocated by local governments. Once substantive interests are
involved in this coordination mechanism based on collective consultation, it
is often unable to reach a consensus.
Recommendation 2: In order to facilitate eco-compensation schemes at the river basin scale, (1)
Enhance river basin coordination river basin authorities could be given the mandate to act as a platform or
and consultation mechanisms. convenor to promote coordination between different sectors and jurisdictions;
28 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
(2) inter-provincial river chief coordination mechanisms could be established to
facilitate upstream-downstream information sharing and joint decision-making;
and (3) more broadly, and long term, governments could consider merging
the basin-level authorities (currently there are parallel commissions under
the Ministry of Ecology and Environment [MEE] and the Ministry of Water
Resources [MWR]), strengthening their mandate (to include enforceable actions
rather than only advisory functions), and incorporating a broader stakeholder
membership base.
Challenge: Water quantity, quality, and services are managed by different departments,
Water management responsi- including the MWR, MEE, Ministry of Natural Resources, Ministry of Housing
bilities are fragmented in different and Urban Development, Ministry of Transport, National Energy Administration,
ministries and sometimes and so forth. Each sector ministry is responsible to formulate and implement
conflicted sector plans. sector plans, which are not always consistent or harmonized.
Recommendation 3: To address implementation issues relating to the separation of policy areas and
Enhance cross-sector coordination provide clear demarcation of implementation and service delivery roles from
with clear and separated functions consultative, executive, regulatory, monitoring, and evaluation roles within
and harmonize planning processes. and between government agencies (1) harmonize the different sector planning
processes and sector plans, for instance, the river basin master plan, spatial
planning, the environmental and ecological protection plan, and so forth; and
(2) enhance consultative mechanisms and their effectiveness during different
sector planning processes.
INFORMATION
AND KNOWLEDGE
Challenge: While there is a proliferation of eco-compensation schemes, current eco-com-
Basin-level objectives and pensation schemes are focused at subbasin levels and often carried out with
understanding of conditions a specific administrative region, i.e., county, municipality, and province. There
are lacking. is a lack of holistic basin-level environment goals to guide the design of
eco-compensation schemes, including no systematic framework for monitoring
and assessment to determine the baseline, establish objective targets, and
identify key locations with the highest marginal returns. There is also a lack of
pollutant inventories, baselines, and estimates of the environmental carrying
capacity of the Yangtze River Basin, both in the main stem and in the tributaries.
Section 5. Challenges and Recommendations for Improving Eco-compensation in the YREB 29
Recommendation 4: River basin hydrological and water quality modelling should be carried out
Conduct basin-level studies and based on an inventory analysis of water use and polluting activities. Basin-level
establish basin objectives. environmental objectives, for instance maximum pollutant loads, should be
determined to guide the development of eco-compensation schemes. A hot
spot analysis should also be conducted at the basin level to identify locations
for the most cost-effective interventions.
Challenge: The determination of compensation standards is cited as a challenge to the
Eco-compensation rates are often development of eco-compensation across the YREB (and more broadly, China).
low and cannot compensate for Robust compensation standards should consider (1) the damage caused by
the foregone opportunity the externality in total, or at least the treatment cost (i.e., the portion of the
development cost in upstream damage caused that is most economically relevant to downstream communities);
reaches. and (2) foregone opportunity costs of upstream economic activity, plus any
transaction and administration costs. In many cases, the compensation paid
to local governments in the upper reaches of the basin does not cover the
opportunity cost of efforts to protect the environment. For example, in the
case of the Xin’an River, Huangshan City has forgone some development
opportunities and made large investments in pollution control. Funds received
by Huangshan City are far from covering these costs. There is also a need
to quantify the causal relationship between the program’s measures and the
ecological effects that result as part of the program design process.
Recommendation 5: Water provides a wide range of benefits associated with context-specific values.
Improve the identification and It is important to evaluate a wide range of the ecological and cultural, as well as
evaluation of water’s values. economical, benefits that ecological protection and improved water management
provide. Those exercises need to involve the full range of stakeholders. There
are well-established techniques for valuing ecosystem services, including
through participatory means; technical guidance from basin organizations,
such as the MWR or MEE, could be used to help ensure consistent quality.
More broadly, negotiations between parties in a voluntary context or reverse
auctions (where parties bid for the right to provide ecological services) can
determine appropriate compensation amounts.
Challenge: Information sharing and transparency are not only crucial to facilitating the
Information sharing, especially establishment of credible inter-provincial eco-compensation schemes, they
with broader stakeholders, are also necessary for identifying and evaluating the wide range of values
remains limited. associated with the benefits derived from water and ecological protection.
30 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
However, information availability both from and to the public is limited, and
information flows within the governmental system are often siloed. For example,
environmental departments publish routine water quality data that often only
list the class of water quality rather than the concentration of specific pollutants,
which hinders the ability for stakeholders to undertake their own inventory
analysis, and more broadly, undermines confidence in programs.
Recommendation 6: Sector departments, including environment, water, and urban, and different
Promote information sharing, levels of government, often have their own isolated information platforms.
transparency, and citizen Public access to those data is even more restricted, with some of the data
engagement. only published in hard copy, if at all. Some nongovernment organizations have
made attempts to increase both data from and to the public by (1) machine
learning technologies that consolidate various data from online sources; and
(2) online platforms and cell phone apps that allow the public to upload and
download information. Those advanced technologies and practices can also
be introduced to help improve information transparency in eco-compensation
schemes.
INCENTIVES
AND COST-
EFFECTIVENESS
Challenge: As seen across the YREB, eco-compensation pilots are organized and implemented
Eco-compensation funding is by governments, with low participation of enterprises and the public. There
not diversified, and private sector is an exception in the Chishui River Basin Program, where eco-compensation
participation is low. contributions are made by the Maotai distillery and other enterprises, but such
examples remain atypical. In 2016, 87.7 percent of total ecological compensation
funds were provided by the central government, 12.0 percent by the local
government, and the proportion of funds from all sectors of society below
1.0 percent.26 Furthermore, funds within the YREB are characterized by “less
horizontal and more vertical,” that is, a high reliance on central government
transfers. This reduces the incentive strength of the program, as results are not
directly paid for by downstream beneficiaries (either jurisdictions or enterprises).
26 Statistics compiled by the China Ecological Compensation Policy Research Center, China Agricultural University.
Section 5. Challenges and Recommendations for Improving Eco-compensation in the YREB 31
There is a lack of benefit sharing between the downstream and upper-middle
stream of the Yangtze River Basin. Ecological services have regional characteristics,
and the income of ecological services is unevenly distributed among different
regions. Enterprises or jurisdictions in the middle and lower reaches of the
Yangtze River Basin, as the direct beneficiaries of ecological services, should
provide compensation funds to the upper reaches of the Yangtze River Basin
through horizontal transfers; diversified benefit sharing mechanisms can also
be developed. In addition to financial subsidies, industrial support, technical
assistance, talent support, employment training, and other compensation
methods lack due attention.
Recommendation 7: Diversified funding can be achieved through matching programs, which pair
Diversify financing sources and private or municipal funds contributions (for example, from water utilities) with
leverage the private sector. central or provincial funds. Over time, these matching funds may decrease
as familiarity with the program develops and transaction costs are reduced
through economies of scale and organizational efficiency. This mirrors the central
government’s use of matching funds to encourage provincial development of
horizontal programs, beyond the public sector.
Challenge: Transfer payments in many provincial programs are based more on population
Fund allocations in vertical characteristics (development status, population, and ethnic group proportion)
schemes do not emphasize than on ecological indicators. Compounding this, formulas are often not made
the importance of ecological public. Provincial governments have significant power through their allocation
protection. of compensation funds, which may lead to the problem of unequal allocation
and biases in performance evaluation. Although the provincial governments
of the YREB explicitly require the provincial finance departments to establish
performance evaluation mechanisms and implement rewards and punishments
accordingly, such mechanisms are not commonly established.
In some cases, the multi-objective nature of allocation mechanisms leads
to an inefficient use of funds. Considerations of livelihood and development
objectives are built into the allocation decisions of some regional and national
funds. For example, in the transfer policy of national key ecological function
areas, provincial governments have a large flexibility in allocating the funds,
which may lead to “equalitarianism”—positive in terms of equity considerations,
but resulting in a large number of funds being invested in regions with lower
ecological efficiency.
Recommendation 8: Recognizing that public spending still constitutes the primary source for ecological
Promote results-based financing and environmental protection activities, it is key to improving their efficiency
to ensure achievement of the and maximizing the impacts. Governments have been implementing a policy of
environmental and ecological “rewards replacing subsidies” for decades for various targets, which has helped
goals. direct the allocation of fiscal resources based on the achievement of clearly
32 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
defined indicators. International financing institutions, such as the World Bank,
have promoted results-based financing instruments (which may interface well
with carefully developed and well-functioning results-based eco-compensation
programs). Compared to traditional infrastructure financing, results-based
financing promotes the effectiveness of the financing. These principles apply
equally to government financing. An alternative to results-based financing is
to enhance the system of monitoring, tracking and performance evaluation
of ecological and environmental spending, which is crucial to maximize the
ecological protection outcomes with limited public resources.
Challenge: In one location there are commonly multiple schemes focused on forests,
There is a lack of coordination rivers, grasslands, wetlands, and other ecosystems managed by different
between different types of vertical sector departments. Special transfer payments are made by each department,
eco-compensation schemes due leading to repeated investment, duplicated payments for the same essential
to insufficient integration in river activities, and an overall lack of strategic deployment of public resources.
basin management. Programs are not typically developed in the context of an integrated river
basin management framework, which could otherwise help direct program
designs toward the most efficient activities for given ecological and water
pollution outcomes.
Recommendation 9: Map and coordinate flows of funding and interventions to realize synergies
Avoid duplicate financing where and co-benefits between different targeted programs. For example, wetland
unnecessary to incentivize the restoration can provide both biodiversity and water benefits, with some wetland
desired action. projects potentially eligible for financing from different eco-compensation
schemes. This may be justified in cases where such stacking of payments is
required to overcome the opportunity cost of the action. However, conditions
under which this is permitted should be specified, and stacking otherwise
minimized for the cost-effectiveness of payments in aggregate. The management
of different channels of funds should be designated to the same department
to avoid inefficient stacking, otherwise information sharing between agencies
would be critical.
Section 5. Challenges and Recommendations for Improving Eco-compensation in the YREB 33
Photo: Marcus Wishart. World Bank.
Section 6.
Conclusion
China has ambitious plans for transition from a traditional emissions- and resource-intensive
economic growth path, toward high quality and sustainable development with increasing
emphasis on the environment. The YREB Development Plan, and the National Strategy for
Ecological Protection and Restoration of the Yangtze River, are illustrative of such ambition.
However, with substantial regional development disparities, protection of the Yangtze River faces
persistent challenges in balancing the need for socioeconomic development in the upper and
middle reaches, and the rising national expectation and aspiration for ecological restoration and
environmental protection.
Eco-compensation provides a pathway for realizing the This policy note has presented an overview of five programs
government’s aspirations for the Yangtze River. This is in the Yangtze River Basin, chosen for their differing
recognized by the government, as reflected in the national approaches and geographies. Despite these differences,
rhetoric around “clear waters and lush mountains are invaluable common themes and challenges faced by each can be
assets” (signaling the economic and social value of natural seen, leading to a set of broad policy recommendations
capital). Eco-compensation is being increasingly applied (figure 6.1.). With adaptive policy processes, harmonized
toward the government’s vision for the Yangtze River Basin’s and transparent data, and monitoring, China’s extensive
ecological protection and water pollution control. experience with eco-compensation can point the way to
improved programs in the future.
34 Eco-compensation in China’s Evolving Environmental Management Regime | Ecological Protection and Water Pollution Control in the Yangtze River Basin
FIGURE 6.1: Recommendations for Improving Eco-compensation Schemes in the YREB
INSTITUTIONS INFORMATION INCENTIVES
• Develop national • Conduct basin studies • Diversify financing
guidelines, standards, and establish basin sources and leverage
and protocols objectives the private sector
• Establish inter-jurisdiction • Identify and evaluate • Promote results-based
coordination mechanisms the value of water and financing on ecological
at the basin level ecosystems and environmental
protection
• Enhance cross-sector • Promote information
coordination and sharing and citizen • Avoid duplicate
harmonize di erent engagement financing where
sector plans unnecessary
Source: Authors’ elaboration.
Section 6. Conclusion 35
August 2021